Wholesale Prices Offer Positive Surprise. What It Means for the Fed.

Prices for finished goods rose 0.3% in June from May, which the BLS reported was the largest increase since February. Above, a street scene in Manhattan. (Spencer Platt/Getty Images)

Wholesale inflation was softer than expected in June, potentially paving the way for a more benign reading of the Federal Reserve’s preferred inflation gauge, due to be released at the end of the month.

The producer price index for total final demand was unchanged in June, the Bureau of Labor Statistics reported on Wednesday morning. That was below economists’ 0.2% consensus estimate and compares with a revised increase of 0.3% in May. The PPI was 2.3% higher than a year earlier, versus a 2.7% rise in the year through May.

The core PPI, which excludes food and energy prices, was also flat compared with May, again softer than the consensus call for a 0.2% gain and down from a 0.4% rise in May from April. The core wholesale price index rose 2.6% from a year earlier.

“Tariff passthrough is visible in today’s PPI data, but producer price inflation overall remains damper than many expected just a few months ago when the tariffs started rolling out,” wrote Oren Klachkin, an economist with Nationwide Financial Markets. But don’t expect that to shift the Fed’s position on rate cuts soon; the central bank likely will remain hesitant to lower borrowing costs until tariffs’ effects on prices become clearer.

Many economists say that taken together, the June PPI and the consumer price index data released Tuesday signal that the personal consumption expenditures price index will show a 0.3% monthly gain in June. Core PCE, which also excludes food and energy, is expected to rise by 0.3% month over month for June, but could slip to 0.2%. Before Wednesday’s PPI release, many economists were expecting a 0.4% increase.

The June PCE inflation data will be released on July 31.

“The components from PPI that feed through into the Fed’s favored measure of inflation – the core PCE deflator – were fairly mixed,” wrote James Knightley, chief international economist at ING. But overall, they point to an increase of 0.2% month over month, he said. Airfares and healthcare costs were softer in the PPI than the CPI, for example, but portfolio-management fees jumped.

If the core PCE inflation is as expected in June, Capital Economics’ North America Economist Bradley Saunders wrote, the three-month annualized rate of price growth would be back up to 2.3%. That would be a reversal of a recent trend toward slower increases and would remain above the bank’s target of 2%.

As a result, it is unlikely to encourage Fed policymakers to lower interest rates at their next meeting, scheduled for July 29-30. But it is “arguably better than could have been hoped for when President Trump first started threatening large reciprocal tariffs earlier this year,” Saunders said.

The BLS, however, did increase its May readings for both headline and core PPI. It now says headline PPI increased 0.3% in May, compared with the previously reported 0.1%. The change in the core index was bigger, going from a gain of 0.1% to 0.4%.

Those revisions, pointing toward still significant inflation, will limit any expectations in the bond market that the June PPI data will lead to a more “dovish” Fed, Knightley said.

Goods prices rose 0.3% month over month in June, up from the 0.1% gain in May. Services were behind Wednesday’s softer result. The cost of services fell 0.1% after a 0.4% increase in May.

Leading that service-price slump was a 0.9% drop in the cost of transportation and warehousing. Knightley said this was likely due to companies reducing their inventories after trying to build up their supplies of goods ahead of tariffs during the first quarter. Wednesday’s report also showed a 2.7% month-over-month drop in prices for airfares, likely due to weak demand.

Still, it wasn’t all good news on Wednesday. Prices for finished goods rose 0.3% in June from May, which the BLS reported was the largest increase since February.

Core goods prices also rose 0.3% on the month, indicating that there were some effects of higher tariffs, particularly in furniture and home electronics, Saunders wrote.

That adds to the argument that a softer PCE report may not be coming after all. Santander’s chief economist Stephen Stanley wrote that there were “a lot of the little categories”—including appliances, cookware, sporting goods, books, prescription drugs, games, and household linens—in the CPI that posted sharp increases in June.

The price changes in these categories feed straight through to calculating the core PCE inflation. “By the way, many of these goods could plausibly be connected to tariff hikes,” Stanley noted. As a result, he is expecting both headline and core PCE to rise 0.3% month over month in June. This matches updated forecasts from Bank of America and Morgan Stanley.

At the very least, it is too soon to declare that higher tariffs will only have a modest impact on tariffs. “The July, August and September inflation readings are the ones we (and the Fed) will be more nervous about,” Knightley said.

Write to Megan Leonhardt at megan.leonhardt@barrons.com